Essays on Inequality VII – Seven Big Lies, and the Next Depression

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There’s a reason I pass along so much of Robert Reich’s work:  He’s very good, and he gets it right.  Now we learn that he can draw as well – he’s a fine illustrator!

In this post and short video, Reich identifies “The Seven Biggest Economic Lies” the American people are being told by the top 1% and their politicians.  “The President’s Jobs Bill” he says,”doesn’t have a chance in Congress — and the Occupiers on Wall Street and elsewhere can’t become a national movement for a more equitable society – unless more Americans know the truth about the economy.” He asks that we pass it on, and I am delighted to do so; others who read this post should too.

Here is Robert Reich’s list of the seven biggest economic lies (watch the video or read the text narrative on the site for his explanations):

1. Tax cuts for the rich trickle down to everyone else;

2. Higher taxes on the rich would hurt the economy and slow job growth;

3. Shrinking government generates more jobs;

4. Cutting the budget deficit now is more important than boosting the economy;

5. Medicare and Medicaid are the major drivers of budget deficits;

6. Social Security is a Ponzi scheme;

7. It’s unfair that lower-income Americans don’t pay income tax.

“These seven economic whoppers are just plain wrong,” Reich says. ” Make sure you know the truth – and spread it on.”  And keep this list in mind as you read on.

The Cost of Living With These Lies

As Reich points out, boosting the economy is now crucial to eventually overcoming deficits and government debt.  It has been the decline of the bottom 99% and their income tax revenues (especially since the Clinton Administration), together with much lower tax revenue support from the wealthy and corporations, that has made balancing the budget impossible.  This has permitted the top 1% to falsely blame spending, and argue for perpetuating a vicious cycle: Continue to cut government spending (but not, ironically, the military/war budget where it’s profitable for the top 1%) and reduce taxes for the rich and corporations still more, so they won’t be “afraid” to invest in America and American jobs.

It is crucial to understand why this is exactly the wrong thing to do.  For the bottom 99%, this wrongful approach has been a prescription for disaster over the entire last 30 years and now, since the Crash of 2008 and the onset of the Great Recession, the disaster is here.  Fasten your seat belts, and let’s review what has happened:

1. Over the last 30 years, the top 1% has more than doubled its share of America’s total wealth, and increased its share of total pre-tax income from 8.9% in 1976 to 23.5% in 2007;

2.  The excessive transfer of wealth to the top 1% from the bottom 99% continues, and is accelerating as the top 1%’s share of all new income growth increases to scandalous levels (i.e. – the engines of growth are controlled by the top 1%);

3.  The top 1% has accomplished this by maximizing its profits from and controlling the consumer economy (squeezing out small businesses) and from government contracts and tax breaks (in areas like the military, war, public health, and corporate welfare).  It has increased its after-tax income by almost 300% over 30 years, while outsourcing jobs and capital and keeping its own share of taxes as low as possible.  Consequently, the bottom 99% has rapidly lost its share of incomes and wealth to the top 1%;

4. Over the last 30 years, the bottom 99% has lost about 1/3 of the wealth it likely would otherwise have had (at least $18 trillion), while the top 1% has increased its wealth by more than $10 trillion by virtue of increasing its percentage of total net worth;

5.  Over just the last four years, since the crash, America’s median income has fallen an incredible 10%, while the bottom 90% has lost about 1/2 of its remaining wealth, “official” unemployment has remained at about 9%, and the number of people living in poverty has accelerated, rising from 43.6 million in 2009 to 46.2 million in 2011 [2];

6.  There are now effectively two economies, as the top 1% rips itself loose from the American Domestic economy, investing in the Global Financial economy while participating in the American Domestic economy mainly to extract as much wealth and income as it can from the bottom 99%;

7. Averaging (both statistically and conceptually) the growth and success of the top 1% together with the decline of the bottom 99%, which is what reported official data usually does, blunts our understanding of both how well the top 1% is doing and how poorly the bottom 99% is doing.  Today the bottom 99% in isolation, the American Domestic economy, is in a depression. (See A Tale of Two Economies.)

It is no surprise, as things get so much worse so quickly, that the bottom 99% has felt the enormous disruptions keenly enough to Occupy Wall Street and hundreds of other business and financial locations around the country.  Keeping in mind Mr. Reich’s economic truths, consider again this bar graph:

This graph shows the percentage of income (GDP) growth that is going to the top 1%, compared to the bottom 90%.  Since the early 1970s, the percentage of growth going to the top 1% has dramatically increased, while the bottom 90%’s share of growth has been rapidly eliminated.  Below the top 1%, the rest of the top 10% has kept a fairly constant share of income growth, but as the middle class has declined, so has the lower segment of the top 10%.  Let’s take a closer look:

Percentage of Income (GDP) Gains

Period                                                           Top 1%       Next 9%       Bottom 90%  

1.  1923-1929 (pre-depression)                           70%               14%                  16%

2.  1960-1969 (peak growth/prosperity)          11%                 24%                 65%

3.  1992-2000 (Clinton period)                           43%               27%                  30%

4.  2002-2007 (pre-depression)                         65%               22%                  13%

5.  2012-2017  (JMH estimate)                           75%                16%                     9%

6.  2012-2017 (historic trendline)                      85%                12%                     3%      

In the period of America’s highest prosperity and growth (1960-1969), the top 1% captured only about 11% of income (GDP) gains, while the bottom 90% captured 65% of those gains, and the thriving top segment of America’s growing middle class (the 9% in between) enjoyed about 24% of those gains.  As Reich points out, these are periods of relatively high taxes on the rich (The top tax rate ranged from 91% to 70% in this period.)

Notice that by 2002-2007 the top 1%’s share of income gains had risen again to about 65%, due among other things to the Bush tax cuts, while the bottom 90%’s share (which had fallen to 30% in the 1990s) fell all the way down to 13% in the 2002-2007 period;

By 2007, there was not much (if any) of the former middle class prosperity left in the bottom 90%, and since then, as a consequence of the 2008 crash and the Great Recession, median household income has fallen another 10%.  Thus, wealth continues to transfer to the top 1% as top 1% incomes continue to grow (see A Tale of Two Economies).

We do not yet have income inequality numbers for 2009 or 2010, but we already know that the former middle class is vanishing as the bottom 90%, along with the bottom portion of the top 10%, continues to lose its share of incomes and the top 1% continues to capture most of the growth in incomes.  [3]

My Expectations

I have concluded in this series that the American Domestic economy of the bottom 99% is in a depression, and I predict that others will be reaching the same conclusion soon.  The graph shows that between the Clinton years (1992-2000) and the GW Bush post-recession years (2002-2007) the top 1% increased its percentage of income gains from 43% to 65%.  In other words, the top 1% is increasing its near total grip on income growth – it’s likely taking over 70% of new income today.  That’s astronomical, and it’s socially reprehensible: it spells the end to quality education, upward mobility, and health and economic security – all of the effects we are witnessing today – for most of the bottom 99%.

On that trend-line, the top 1%’s share of growth will be 85% in the 2012-2017 period, as shown above.  The entire bottom 99% will be receiving only 15% of income growth. The next 9%’s share of growth would be squeezed down to something like 12%, and the bottom 90%, which already has only 13% (less than its 16% share in 1929), will be reduced to something like 3%, if it experiences any income growth at all.  My own conservative (and optimistic) projection, also shown above, is that the top 1% will only capture about 75% of income growth. 

This is, as Yogi Berra might say, deja vu all over again: Under both the trend-line scenario and the more optimistic scenario I suggest, income, wealth, and welfare distribution actually become worse than in 1929, just before the Great Depression. (The top 1% reached “only” about 70% of income growth in the decade before the Great Depression.)

Remember, it isn’t just that inequality is still growing – it’s growing like wildfire.  The growth of inequality is accelerating.  In light of what has happened in just the last decade, if the top 1% continues to hold controlling political power, and our federal and state governments continue to insist on cutting taxes for the rich and corporations and reducing government participation in the economy, this is the future we face.  And it’s coming soon.   

Reich is Right

So it’s pretty obvious now, is it not?  Cutting taxes of the “job creators” even more, and eliminating “pesky regulations” that make profiteering more difficult for the top 1%, is not the path to shared prosperity.  In fact, it’s not the path to any kind of prosperity.  It’s a path that does not even appear to offer economic survival.  On this path, I see the Domestic Economy of the bottom 99% collapsing by 2017.  Regardless, the trend of increasing inequality must be reversed, or an eventual collapse is inevitable.

President Obama is telling us this is an emergency, and he’s not playing politics.  But still it seems unreal to be in this situation: Where has he been?  Until very recently, hardly anyone has been thinking about inequality, and it’s been off the radar screen of my local newspaper, the Albany Times Union, as well.  But Occupiers have suddenly taken to the streets everywhere, as people feel the severe decline.  And low and behold, when I picked up today’s Times Union, I saw this headline staring back at me:

“Income gap a mounting crisis” 

Eureka!  Well, it’s about time!  I haven’t read the article [4] yet.  I’ll let you read it first. . .  (All right, I couldn’t help it, I had to read the article!  Unfortunately – but not surprisingly – the author significantly understates the current rate of growth of income inequality: Combining essentially the latest two time periods of Emmanuel Saez’s data on the above graph (1992-2000 and 2002- 2007) into one period (1993-2008), the article concludes that the top 1% is taking 52% of new income, in itself a shocking number.  But we already know (from the same data source) that while the top 1% took about 43% during the Clinton years, it took 65% during the GW Bush post-recession years (2002-2007) and is clearly taking even more than that now.  This effectively sugar-coats the bad news:  There’s a big difference between the top 1% taking a little more than 1/2, and taking almost 2/3, of all new income.)

JMH – 10/14/11, rev. 10/15-16/11

_____

[1] The Seven Biggest Economic Lies, by Robert Reich, Truthout, October 12, 2011

[2] Poverty continues to rise in U.S., now 15.1%, by David Morgan, CBS News, September 13, 2011.

[3] See the discussion in 2009 of this problem by Emmanuel Saez in 2009, Income Inequality Is At An All-Time High: STUDY, The Huffington Post, 8/14/09, updated 9/14/09.

[4] Income gap a mounting crisis , by David J. Lynch, Bloomberg News, October 14, 2011.

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